Working with the recognised professional bodies (RPBs), the Insolvency Service has recently updated its guidance to the RPBs on monitoring insolvency practitioners (IPs) with high caseloads of individual voluntary arrangements (IVAs) or protected trust deeds (PTDs).
As part of this work, it has been agreed that the RPBs will own the definition of what constitutes a volume IVA provider or PTD provider. This will enable the definition to be amended easily, in future. Although the guidance can be applied and disapplied at an RPB’s discretion, notwithstanding an IP’s caseload, the new definition is based on overall case numbers handled by the volume provider. For instance, a portfolio of 5,000 IVAs or 2,000 PTDs in a 12-month period will make an IP, or the entity in which they operate, a volume provider. There’s also a new, third category, which will render an IP or the entity in which they operate, a volume provider if they have 1,000 nominee-only IVA cases in a 12-month period. If an IP or the entity in which they operate is a volume provider, the RPBs will apply the Insolvency Service’s guidance when carrying out monitoring, and volume providers will need to be familiar with the content of the guidance.
While the RPBs get monthly statistics showing IVA cases by organisation, the data only records supervisor appointments, meaning the third leg of the definition will be less straightforward to track. We’ll be contacting those IPs we think will be affected by this part of the definition, but if you believe that you will be a volume provider by virtue of the third definition, please email insolvency@icaew.com
FCA ban on referral fees
The Financial Conduct Authority (FCA) recently announced changes to its rules which will prohibit debt packagers from being paid referral fees when they refer cases to IVA providers after 2 October 2023. Debt packagers are commercial debt advice providers which do not typically provide debt solutions themselves. What has led to this ban is that work by the FCA identified that:
- almost all revenue generated by debt packager firms comes from referring customers to debt solution providers in return for a referral fee; and
- the sums paid for referrals for IVAs and protected trust deeds is higher than for other debt solutions which indicates that there’s an incentive for debt packager firms to provide advice which is not compliant with the FCA’s rules or is biased towards recommending debt solutions that generate the most revenue for the debt packager, even if this does not have regard to the customer’s best interests.
IPs are already prohibited by the insolvency code of ethics (R2340.5) from paying for referrals. The payments currently made to debt packagers tend to be for the package of documentation that the IP receives about the debtor’s circumstances (including details of their assets and liabilities and an assessment of their income and expenditure).
However, these payments will be caught by the FCA’s ban as it covers any commission, fee or any other financial consideration, received by a debt packager firm, directly or indirectly, from a debt solution provider in connection with the firm referring customers to a debt solution provider, or any other related services.
For debt packagers in existence before 2 June 2023, the ban will come into force on 2 October 2023, after an implementation period. From 2 October 2023, existing debt packagers (and their appointed representatives) are banned from receiving remuneration (including any fee or other financial consideration) directly or indirectly from debt solution providers in connection with referring customers to a debt solution provider, or any other related service. No debt packagers can start or restart debt packager activities during the transition period.
If you are currently paying a debt packager, obviously these arrangements will have to cease, effective from 2 October 2023.
IPs need to be diligent
However, the FCA’s ban on payments to debt packagers only covers part of the problem as it doesn’t extend to unregulated lead generators which cannot provide debt advice. The revisions to Statement of Insolvency Practice 3.1 (SIP 3.1), which came into effect from 1 March 2023, requires IPs ‘to undertake sufficient due diligence on any referrer to identify whether they have advised the debtor and, if so, whether they are required to be authorised by the FCA for debt counselling or are able to rely on an exclusion or exemption in relation to the debt advice’. The referrer’s authorisation status should be evidenced, or details sufficiently documented and retained in each case. In each case where advice was given by the referrer, any contractual arrangement between them and the IP should extend to the IP maintaining access to all the referrer’s communications with the debtor, including call recordings or detailed written notes where calls were not recorded and transcripts of webchats or other communications where undertaken. Any shortcomings in the advice, including in relation to the referrer’s authorisation, should be remedied by the IP giving appropriate advice themselves within the scope of the insolvency exclusion.
What does it mean to the marketplace
We, the Insolvency Service, the FCA and the other recognised professional bodies (RPBs) are expecting the FCA ban to have an impact on IVA providers’ business models and case acquisition processes. And we are all working together to understand the wider impacts of the rule change on the market.
ICAEW has already had conversations with a number of its IVA providers in this sector to understand how this change will impact their practices. And we will be seeking their written confirmation of the changes being made.
It’s also worth mentioning that the FCA has been contacting debt packager businesses asking what their plans are for their business once the ban on receiving referral fees comes into effect. As there is no specific FCA permission for debt packagers, the FCA has been attempting to identify debt packagers from the authorised population which holds a debt counselling permission. This had led to at least one IP being mis-identified as a debt packager by the FCA. If you are incorrectly contacted by the FCA as a debt packager you should simply respond to their communication explaining that you are not a debt packager business.